Buying bonds in muniland

By Cate Long
July 19, 2013

When I started the Muniland blog in April, 2011, municipal bonds were being affected by a low interest rate environment, making them expensive and offering low yields to investors. Since non-institutional investors usually have to pay big mark-ups to buy them, it didn’t make sense to encourage people to own individual bonds. But the interest rate environment in the next year will be changing, and folks might want to consider good quality municipal bonds as long-term investments. It may start to make more sense that I talk about trading commentaries by muniland professionals.

One of the most-used benchmarks in muniland is the “Municipal-to-Treasury” ratio. Anthony Valeri writing for Learnbonds.com says:

Municipal valuations are at their most attractive levels of the past several years, according to average municipal-to-Treasury yield ratios. Average 10- and 30-year AAA municipal bond yields are 112 percent and 114 percent, respectively, of comparable maturity Treasury yields (using Municipal Market Advisors yield data) as of July 10, 2013. The higher the yield ratio, the more attractive municipal bonds are relative to Treasuries and vice versa. A ratio over 100 percent means that yields on top-rated municipal bonds are exceeding those of comparable Treasuries, and investors get the added tax-benefit to boot.

This benchmark tells us how municipal bonds are trading versus Treasury bonds. They are at high levels on a historical basis. There is a flag waving over the sector saying value is here today.

Valeri says that Muni-Treasury ratios are at levels not seen in several years, but the data chart that he uses shows the current highs are similar to the highs reached around August of 2012.

Thomson Reuters Municipal Market Data shows the same in August of 2012:

Nevertheless, Valerie shows that Muni-Treasury ratios are signaling good value in muniland.

Valerie discusses which part of the yield curve (the length of time until bonds mature) offers the most value. He suggests buying bonds that have long maturities (15-30 years until maturity):

Investors may wish to consider intermediate and long-term maturity municipal bonds. In addition to higher yields, valuations are more attractive relative to short-term bonds and both segments enable investors to take advantage of a steep yield curve… Intermediate, long-term, and high-yield municipal bonds were among the hardest hit during the recent sell-off and may stand to benefit most from any stabilization in the municipal bond market.

In contrast, Thomson Reuters Municipal Market Data analyst Dan Berger wrote yesterday:

We find the 10 year range very attractive. The 30 year range is not appealing at all. It appears that the 30 year range has lost a lot of support and with [mutual] funds selling more than $10 bln during the past month the slope could widen further.

Berger is saying to stay with bonds that have shorter maturities (around 10 years), because mutual funds, which have to sell their portfolio holdings when fund redemptions happen, will typically sell at the long end of the yield curve (15-30 years till maturity). This means that those longer bonds could cheapen and push yields even wider.

This higher-level trading commentary can be important for figuring out the maturities of bonds that you are interested in buying. It doesn’t have anything to do with whether a bond is from a specific state or city to be a good value now.

 

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